Capital Gains Tax on Real Estate in Washington State

Understanding Washington’s capital gains tax and its nuances is critical for anyone planning to sell property in the state. Although real estate transactions are currently exempt from Washington’s new excise tax on capital gains, the state imposes other taxes, like the Real Estate Excise Tax (REET). These transactions are also subject to federal capital gains taxes.

Notwithstanding, there are several strategies you can use to reduce or defer these taxes. At the top of the list is a 1031 exchange. By reinvesting the proceeds from the sold asset into a replacement property, you can completely defer your capital gains tax liabilities. However, to be eligible, you must adhere to strict IRS rules and work with an experienced Qualified Intermediary.

Universal Pacific 1031 Exchange has spent 35+ years guiding investors across Washington and beyond through tax-deferred exchanges. We are a trusted Qualified Intermediary in Washington with experience in handling complex transactions, navigating tax rules, and helping clients execute 100% IRS-compliant 1031 exchanges. Book a free consultation to get started.

This comprehensive guide covers the fundamentals of capital gains tax and how it works. It also discusses how federal capital gains tax applies to real estate and which strategic steps to take to fully defer or minimize this tax.

What Is Capital Gains Tax and How Does It Work?

Capital gains tax is simply the levy placed on any profit realized from the sale or exchange of an asset, such as bonds, business interests, real estate, or stocks. On the other hand, “capital gains” is the term ascribed to the profit realized from the sale after the adjusted basis and purchase price are subtracted.

The IRS divides capital gains tax into two broad categories: long-term capital gains tax and short-term capital gains tax. This categorization depends on how long the asset was held. Profits made from properties held for a year or less are taxed as short-term gains at the same rate of 10% – 37% as ordinary income.

Conversely, if the property was held for over a year, it’s considered long-term capital gains and taxed at 0% – 20%. In addition to this, you may pay an extra 3.8% Net Investment Income Tax if your annual modified adjusted gross income exceeds any of the stipulated IRS thresholds for your filing status.

How Does Federal Capital Gains Tax Apply to Real Estate Sales?

Federal capital gains tax applies to real estate sales when the net profit exceeds the property’s adjusted cost basis and selling expenses. Adjusted cost basis is the sum of the purchase price, capital improvements, and allowable selling expenses minus depreciation. Depreciation is a form of tax deduction you claim based on the declining useful life of a property.

You’re mandated by law to pay the applicable capital gains tax on this net profit irrespective of whether you’ve paid the state-level tax. Federal capital gains tax is quite significant and can take up a large chunk of your profit if you don’t structure your sale properly.

Most real estate investors prefer to hold properties for over a year since it allows them to pay less taxes of 0% – 20%, as opposed to the 10% – 37% ordinary income rates imposed on short-term capital gains. The exact federal long-term capital gains tax on real estate depends on your filing status and annual income bracket, as seen in the table below:

Does Washington State Have a Capital Gains Tax on Real Estate?

The State of Washington does not impose capital gains taxes on real estate transactions. Notably, it’s one of the nine states that do not levy any personal or corporate income tax. However, in 2021, the state’s Legislature passed the ESSB 5096 bill, which introduced a capital gains tax equal to 7% of the proceeds from the sale or exchange of certain long-term capital assets. 

Shortly after it was passed, the Douglas County Superior Court ruled that the bill was unconstitutional. However, in 2023, the Washington Supreme Court overturned the decision. It upheld that the state’s capital gains tax is valid because it’s an excise tax and not an income tax. The tax applies only to capital gains of individuals (not entities), and such capital gains must exceed the $270,000 standard deduction threshold.

Notably, a single-member LLC is a disregarded entity and its capital gains tax will pass through to the owner. In May 2025, the state modified the law by passing Senate Bill 5813. As a result, the Washington capital gains tax is now 7% for gains between $270,000 – $1 million and 9.9% for gains above the million-dollar threshold.

The tax applies to capital gains on intangible personal property like bonds, business interests in privately held entities, stocks, mutual fund equity, and tangible personal property, such as collectibles and artworks. Exempted assets include retirement accounts, certain charitable donations, livestock, qualified family-owned small businesses, and commercial fishing privileges.

In the same vein, all forms of real estate transactions are exempted irrespective of how long the property was held before the sale. Nonetheless, the state still collects a separate 1.1% – 3% Real Estate Excise Tax (REET) on property

transfers. Unlike capital gains, the real estate excise tax paid is based on the sale price and not on the profit made.

Beyond these, homeowners also pay ad valorem property taxes and Washington estate taxes. The property tax is based on the assessed real estate value, averaging about 0.76% – 0.88% statewide. On the other hand, the Washington estate tax is paid at the demise of the property owner if the estate’s value exceeds $3 million.

Are There Capital Gains Exemptions in Washington?

Washington State offers several key exemptions under its capital gains excise tax. The most notable one for real estate investors is the complete exclusion of all real estate transactions. Whether you’re selling a primary residence, investment property, or commercial real estate, your gains are not subject to Washington’s 7% – 9.9% capital gains tax. 

Important Update (2025): Beginning with tax year 2025, Washington enacted a tiered capital gains tax rate structure under ESSB 5813. The first $1 million in taxable Washington capital gains is taxed at 7%. Any amount exceeding $1 million is subject to an additional 2.9% surcharge, bringing the effective rate to 9.9%.

The state also exempts certain charitable donations and other types of tangible and intangible assets from this tax, including retirement accounts, qualified small business stock, commercial fishing privileges, timber, and livestock used in farming. Corporations are not liable for the tax, as it applies only to individuals.

However, the individual’s Washington capital gains are only subject to the tax if they exceed the annual income threshold of $270,000. The Washington capital gains tax also doesn’t apply to property sold outside the state unless the gain is tied to Washington-based activities or assets.

How Do I Calculate Capital Gains on Real Estate Sales in Washington State?

While Washington state does not generally impose capital gains tax on real estate, understanding how to calculate gains is still important, especially for federal tax purposes or for non-real estate assets subject to Washington’s capital gains excise tax. Here’s a step-by-step guide to calculating capital gains:

1. Determine Your Adjusted Basis: This is usually what you paid for the asset and other costs like closing fees, commissions, and capital improvements expenses. Note that routine maintenance, such as painting and minor repairs, doesn’t count; only improvements that increase value or extend the asset’s life. As such, adjusted cost basis = purchase price + closing costs + capital improvements – depreciation.

2. Identify the Net Selling Price: The net selling price is the amount you received from the sale of the property after all selling expenses have been deducted. These expenses include realtor commissions, title fees, escrow fees, Qualified Intermediary fees, and legal fees.

3. Subtract Your Basis from Net Selling Price: Before doing this, ascertain that every allowable e

xpense has been duly accounted for. Once you’re sure, subtract the adjusted cost basis from the net selling price to get the capital gains. Consequently, the formula for capital gains is net selling price – adjusted basis.

4. Apply any Exemptions or Exclusions: You can significantly reduce or eliminate your taxable income using any tax exemption or exclusion you qualify for. For instance, if the property was your primary residence and you lived there for two of the last five years, you can exclude up to $278,000 (or $500,000 if married filing jointly) from your capital gains. You can also apply any capital losses to offset long-term gains. The remaining amount is your taxable capital gain.

To accurately calculate your capital gains, consider using software like TurboTax or consult tax advisors to guide you through deductions, exclusions, and reporting, ensuring accurate compliance with both federal and state laws.

Filing and Paying Capital Gains Tax in WA

If you owe Washington’s capital gains excise tax, you must file a state-level return with the Washington Department of Revenue (DOR) by April 15 following the end of the taxable year. This is the same deadline as your federal return. Filing is done online through your state account at the WA DOR’s portal. 

You’ll need to include key documents such as your federal tax return (Form 1040 with Schedule D). Also, add details of your long-term capital asset sales and supporting records for any claimed deductions or exemptions, such as business interest exclusions and charitable donation deductions.

Penalties and interests may apply if you miss the deadline or underreport your gains. Intentional failure to file or misreporting can lead to harsher fines or further enforcement. To avoid issues, it’s critical to maintain accurate records and consult a tax advisor if your situation is complex.

What Strategies Can Reduce or Defer Capital Gains Tax in Washington?

As a Washington resident, you can significantly reduce or defer your federal-level capital gains tax in the following ways:

• Use the primary residence exclusion: Section 121 of the Internal Revenue Code (IRC) allows home sellers to exclude up to $278,000 or $500,000 in capital gains, depending on whether they filed as a single taxpayer or married couple. As discussed earlier, you qualify for this exclusion if the sold property was your primary residence for two out of the last five years.
• Complete a 1031 exchange: You can defer both federal and state-level capital gains taxes by reinvesting proceeds from the sale of your investment property into another similar property. To qualify for this tax break, you need to work with a Qualified Intermediary and adhere strictly to the IRS rules and timelines.
• Hold assets long enough to qualify for long-term rates: Federal tax on gains from assets held over a year is significantly lower than short-term rates tied to ordinary income. Unless you’re into property flipping, you shouldn’t sell until the one-year timeline is exceeded.
• Deduct selling costs: Subtract transaction-related expenses like real estate commissions, title fees, and the cost of improvements from your profit to reduce taxable gain. Also, consult your tax advisor to know the other allowable expenses that may apply to your unique transaction.
• Offset gains with losses: If you sold other investments at a loss, use those to cancel out some or all of your capital gains.
• Pay attention to timing: If possible, sell during a year when your income is lower to fall into a lower federal capital gains tax bracket. In the same vein, strive not to miss any IRS deadline, as it can lead to stiff penalties.
• Charitable deductions: The Washington tax system and even the IRS have concessions for charitable donations. You can significantly reduce your tax burdens by donating to child-care programs, school construction, and other causes.
• Real Estate Investment Trusts (REITs): Properties sold via REITs enjoy some federal tax exemptions, including zero corporate income tax, also known as pass-through treatment. The exact benefits on the state level depend on the taxing jurisdiction.
• Talk to tax professionals: Conducting a real estate transaction can be difficult at times. As such, working with professionals, like certified public accountants, tax advisors, and Qualified Intermediaries, will help you identify exemptions and tax credits you might miss and plan with the latest Washington rules in mind.

How Can 1031 Exchanges Defer Capital Gains Tax in Washington?

A 1031 exchange allows real estate investors in Washington to defer capital gains tax by reinvesting the proceeds from the sale of an investment into procuring a like-kind property. Although Washington State’s capital gains excise tax excludes real estate, investors are still subject to federal tax unless they use a deferral strategy like this. 

By postponing tax payments, you can preserve more capital and continue growing your portfolio. However, the process must follow strict IRS rules. The IRS allows you a timeline of 45 days after the sale of your original property to identify potential replacement properties, and a 180-day period from the sale to close in on the property. 

To complete a valid 1031 exchange, the IRS requires that you work with a Qualified Intermediary (QI). This is because the IRS forbids you from directly holding funds. This strategy can be repeated multiple times and in different states, allowing taxes to be deferred indefinitely as long as new like-kind properties are acquired.

In addition, you can use 1031 exchanges to defer income or excise tax in some states. But consult your financial advisor to understand the state’s tax system before proceeding.

What Are the Eligibility Requirements for a 1031 Exchange?

To qualify for a 1031 exchange, the property you sell and the one you purchase must both be held for investment or business purposes. This means primary residences, second homes, or vacation homes not held for business purposes automatically do not qualify. 

In addition, the properties must be “like-kind”, which refers to their nature or character, not necessarily their quality or type. For example, you can exchange an apartment building for a strip mall or vacant land, as long as both are investment properties.

Also, as stated earlier, the properties must be identified and purchased within the IRS-stipulated 1031 exchange timelines of 45 days and 180 days, respectively, as explained in the previous section.

The need for a Qualified Intermediary cannot be overemphasized, as the exchange will be disqualified if you don’t work with one. Finally, both the relinquished and replacement properties must be located within the US, and the exchange must be properly reported to the IRS using Form 8824 with your capital gains tax return.

Failure to meet any of these requirements will make you pay immediate capital gains tax in the year the exchange occurred.

How Do I Report Capital Gains From Real Estate Sales on My Taxes?

To report capital gains from a real estate sale, start by completing IRS Form 8949 and Schedule D on your federal capital gains tax return. You are to enter the sale price, adjusted basis, and any other expenses accurately.

If you received a Form 1099-S, which reports real estate transactions to the IRS, ensure the information you input aligns with what you wrote in the other forms. As of now, Washington State does not require separate capital gains tax reporting for real estate sales since such transactions are exempt from the state’s excise tax on capital gains. 

However, you should stay informed about any changes to state tax laws. Be sure to file your return on time to avoid late penalties, and keep all records related to the property’s purchase, improvements, and sale for at least three years in case of an audit.

Want to Defer Your Real Estate Capital Gains Taxes?

Real estate transactions are currently exempt from Washington State’s new tax on capital gains. However, you still have federal capital gains tax to deal with. As a Washington real estate investor who wants to maximize profit and build a robust portfolio without worrying about the IRS, you can defer capital gains tax through a 1031 exchange.

At Universal Pacific 1031 Exchange, we specialize in helping investors, both old and new alike, navigate the rough terrains of a tax-deferred exchange. With deep experience across various taxing jurisdictions, we can help you plan strategically, stay compliant, and keep more of your capital working for you. Feel free to walk into our 1031 exchange office to start an exchange today.

Accuracy & Sources Disclaimer

The information in this article is sourced from official government publications and is accurate to the best of our knowledge as of the last update on March 17, 2026. All claims can be independently verified through the sources listed below:

Federal Sources:

• IRS Topic No. 409 — Capital Gains and Losses
• IRS Topic No. 701 — Sale of Your Home
• IRS Publication 523 — Selling Your Home
• IRS Net Investment Income Tax (NIIT)
• IRS Like-Kind Exchanges Under IRC Section 1031
• IRS Form 8824 — Like-Kind Exchanges
• IRS Form 8949 — Sales and Other Dispositions of Capital Assets
• IRS Schedule D — Capital Gains and Losses
• IRS Tax Year 2025 Inflation Adjustments

Washington State Sources:

• RCW 82.87 — Washington Capital Gains Tax Statute
• Senate Bill 5813 (2025) — Capital Gains Tax Amendments
• Washington DOR — Capital Gains Tax
• Washington DOR — Real Estate Excise Tax (REET)
• Washington DOR — Estate Tax
• Washington DOR — Property Tax
• Quinn v. State — WA Supreme Court Opinion (2023)

Tax laws are subject to change at both the federal and state level. This content is for informational purposes only and does not constitute tax, legal, or investment advice.

FAQ

Navigating capital gains tax on real estate in Washington State can be confusing, especially with the state’s complex mix of exemptions, excise taxes, and federal requirements. These are some of the frequently asked questions about capital gains tax on real estate in Washington State.

How Much Is Capital Gains Tax on Property in Washington State?

Washington does not tax capital gains from the sale of real estate, whether it’s your primary home, investment property, or commercial real estate. However, proceeds from stock sales, business interests, bonds, and several other tangible and intangible long-term assets are liable for the Washington capital gains tax at a rate of 7% – 9%. Standard deductions apply for annual incomes of $270,000.

Do I Pay Taxes When I Sell My House in Washington State?

Yes, you will pay federal capital gains taxes and 1.1% – 3% Washington Real Estate Excise Tax (REET). Washington does not impose a state-level capital gains tax on real estate transactions.

What Is the New 7% Capital Gains Tax in Washington State?

This is a new excise tax enacted in 2021 that covers sales of certain tangible and intangible personal property. Based on this tax, Washington residents whose worldwide gross revenue limits exceed $270,000 are to pay 7% – 9% of their capital gains to the State of Washington.

Even if you’re not a resident of the state, you may be liable for the tax if a portion of your earnings came from a business or transaction in the state. Although debated, the law was upheld by the Washington State Supreme Court as an excise tax and not an income tax.

How to Avoid Washington State Capital Gains Tax?

While real estate is already exempt, you can reduce or eliminate tax on other gains by:

• Staying below the standard deduction threshold
• Selling in a lower-income year
• Using tax planning strategies like charitable donations or capital tax loss harvesting.

Are There Any Recent Changes to Washington’s Capital Gains Tax Laws?

Yes, the tax year 2025 brought a new tier: 7% on gains between $270K – $1 million and 9.9% on any excess above $1 million. SB 5813 clarifies additional credits, retirement/qualified small business exemptions, and adjustments for B&O starting January 1, 2026. Proposals like Initiative 2019, which would have repealed the tax, were rejected by voters in November 2024.